Q: I'm A Retiree. Is MoneyGeek Right For Me?

Last update on Jan. 12, 2015.



"I'm already retired. Will MoneyGeek's portfolios work for me?"

It's a question I get often. In this article, I'll explain why the answer is yes.


Needs of Young Professionals vs. Retirees

Regardless of who you are or how old you are, what you should look for in an investment solution is the same - you should look to generate the highest returns possible while staying within your risk limits, while also staying liquid (i.e. you can withdraw your money quickly if you need to). This is the same regardless of whether you're in university, or working a full time job, or retired with a sizable nest egg.
So why do many investment advisors treat young professionals and retirees differently? There's just one major reason: risk.
Once young professionals put some savings in for retirement, they typically don't need to touch that money for decades. Therefore, they can theoretically take on a lot of risk in search of higher returns. How much risk they should take is often limited by their own emotional risk tolerance - even though they could theoretically take more risk from a financial perspective, they might not want the emotional highs and lows that come with market booms and busts.
Retirees, on the other hand, will need to access their savings in the near term. That means they typically can't take as much risk with their savings. If the market crashes, they may not be able to wait for the markets to recover before withdrawing money again. Emotionally, each swing takes a bigger toll on them too, because the sum of money involved is usually much larger.
However, if a retiree has more than enough saved for their retirement, and if he/she has the emotional capacity to tolerate risk, there's nothing that says the retiree can't take on more risk in pursuit of higher returns.
In the end, the goal of every investment solution is the same regardless of whether you're a young professional or a retiree. The solution should maximize returns for each risk level, while staying liquid.

What MoneyGeek Offers For Retirees

Let me explain how I construct MoneyGeek's portfolios in pursuit of these objectives.
First, let me talk about liquidity. Most stocks, bonds and ETFs are generally liquid - that is, you can trade in and out of them easily and quickly. I don't include illiquid securities in MoneyGeek's portfolios so unless you're looking to invest tens of millions of dollars to mirror our portfolios, you shouldn't have to worry about liquidity.
More importantly, I devote the bulk of my effort towards constructing a set of portfolios that will generate the highest returns possible for each risk level. Let me explain.
MoneyGeek's portfolios are differentiated along the lines of riskiness. For example, the very conservative portfolio (formerly regular portfolio 1) is a lot less riskier than the slightly aggressive portfolio (formerly regular portfolio 5). Rather than increasing the risk level of each of these portfolios to generate higher returns, I try to figure out a set of financial securities that will generate the highest expected returns to risk ratio (i.e. best bang for your buck), and use them to construct the set of portfolios.
I'll also mention that I use some financial mathematics to try to optimize the expected returns to risk ratio as well.
Now, you might be thinking, "this all sounds good, but how can I figure out my own risk tolerance?". This is where I believe MoneyGeek shines.
MoneyGeek comes with two tools that can help you figure out your own risk tolerance. You can find the first one in the bottom of the model portfolios page. Using the tool will give you an estimated amount that you can lose in both bad and worst case scenarios in the short run (~3 years). Imagining actually losing such amounts and wondering how you might react should give you a good idea as to whether you can tolerate the risk of the portfolio.
The second tool you can use to gauge your risk level is the retirement planner tool. Although it was originally designed to help those who haven't retired yet, retirees can also use the tool (set the desired age of retirement as just one above your current age). As with the previous tool, the output will also give you different scenarios. If you can live with the bad case scenario, you'll know that you can tolerate the risk of the associated portfolio.
In conclusion, since retirees can often tolerate less risk than young professionals, they need less risky portfolios. MoneyGeek provides some model portfolios with historically low levels of risk, so retirees can definitely make use of these. It also offers unique tools that retirees can use to gauge their own risk tolerance, so that they can make wise financial decisions for themselves.
I hope that answers the question. If you have more questions, for the benefit of others, please use the comment box below to ask them.

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